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Flights to Safety

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  • Lieven Baele
  • Geert Bekaert
  • Koen Inghelbrecht
  • Min Wei

Abstract

Despite a large and growing theoretical literature on flights to safety, there does not appear to exist an empirical characterization of flight-to-safety (FTS) episodes. Using only data on bond and stock returns, we identify and characterize flight to safety episodes for 23 countries. On average, FTS days comprise less than 5% of the sample, and bond returns exceed equity returns by 2 to 3%. The majority of FTS events are country-specific not global. FTS episodes coincide with increases in the VIX, decreases in consumer sentiment indicators and appreciations of the Yen, Swiss franc, and US dollar. The financial, basic materials and industrial industries under-perform in FTS episodes, but the telecom industry outperforms. Money market instruments, corporate bonds, and commodity prices (with the exception of metals, including gold) face abnormal negative returns in FTS episodes. Liquidity deteriorates on FTS days both in the bond and equity markets. Both economic growth and inflation decline right after and up to a year following a FTS spell.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19095.

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Date of creation: May 2013
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Handle: RePEc:nbr:nberwo:19095

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Cited by:
  1. Stracca, Livio, 2013. "The global effects of the euro debt crisis," Working Paper Series 1573, European Central Bank.
  2. Habib, Maurizio Michael & Stracca, Livio, 2013. "Foreign investors and risk shocks: seeking a safe haven or running for the exit?," Working Paper Series 1609, European Central Bank.
  3. Bijsterbosch, Martin & Guérin, Pierre, 2013. "Characterizing very high uncertainty episodes," Economics Letters, Elsevier, vol. 121(2), pages 239-243.

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